The end of winter is in sight; as is the end of the year! That means that the regulators are preparing to release an array of new and amended legislation in the next few months.
THE FINANCIAL SECTOR CONDUCT AUTHORITY (FSCA)
Three-year regulation plan
The FSCA released its next three-year regulation plan on 5 July 2023.
The plan follows on from the last year and notes the progress made. The FSCA has stated that it is comfortable with the progress and will not be revising the plan.
The changes to the sectors in terms of conduct legislation are as follows:
- Banking – none earmarked for the next three years
- Insurance – Outsourcing standards and cell-captive conduct standard
- Financial Advisory and Intermediary Services – none (other than the transition to Conduct of Financial Institutions (COFI) legislation)
- Collective Investment Schemes (CISs) – Conduct standard, liquidity requirements, transition to COFI and foreign CISs trading in South Africa
- Alternative investment funds – inclusion under COFI
- Pension and retirement funds – transition to COFI, funds – two-pot system amendments, changes to permissible investment structures, reporting and auditing standards, living annuities conduct standard, and benefit projections conduct standard
“Hurry up and wait…”
Draft position paper on open finance
The FSCA published its draft position paper on open finance on 10 July.
Open finance is the concept that customers own the data they create on the platforms of financial institutions, and have the right to share that data with third parties. An example is that of account aggregation solutions that integrate with different financial institutions by linking customers’ bank accounts, credit and store cards, investments, and loans to allow customers to view their money in one place.
Customers share their data by giving their online login credentials to third party providers (TPPs) to access financial services. Most TPPs are currently not licensed as financial institutions, and therefore fall outside the FSCA’s regulatory framework. There is no regulatory framework for financial institutions already participating in the open finance and data-sharing ecosystem, meaning that the risks deriving from data sharing and data use are not yet directly addressed.
The FSCA considers the governance and operational risk to be high, and potentially to the detriment of customers. It is also concerned about the data protection issues despite the Protection of Personal Information Act. The FSCA’s proposed regulatory framework seeks to address these challenges.
FINANCIAL INTELLIGENCE CENTRE (FIC)
Guidance for Crypto Asset Service Providers (CASPs) and their anti-money laundering risks
The FIC released Public Compliance Communication 57 (PCC57) on 3 July.
This was done partly in response to the Financial Action Task Force requirements and partly because it is simply necessary to create a refence framework for CASPs.
PCC57 notes that in determining whether an entity is a CASP, attention should be paid to the activities of the entity rather than the technology platform being used.
CASPs are defined as:
“A person who carries on the business of one or more of the following activities or operations for or on behalf of a client:
(a) exchanging a crypto asset for a fiat currency or vice versa
(b) exchanging one form of crypto asset for another
(c) conducting a transaction that moves a crypto asset from one crypto asset address or account to another
(d) safekeeping or administration of a crypto asset or an instrument enabling control over a crypto asset
(e) participation in and provision of financial services related to an issuer’s offer or sale of a crypto asset.”
PCC57 goes on to provide some guidance on the money laundering, terrorist financing, and proliferation financing assessment expectations on CASPs. These include:
- Nature and volume of trading of the client
- Type of transaction (e.g. to hosted or unhosted crypto wallets, etc.)
- Source of crypto assets
- Client transaction patterns
- Crypto asset product risk
- Correspondent CASP risk
Some notes on the customer due diligence (CDD) that will need to be built into CASPs’ procedures:
- It is encouraged that CDD is conducted on transactions below the R5,000 threshold when funds are moving to or from high-risk jurisdictions (as updated regularly).
- CDD for CASPs should include the following steps:
- Device identification (including the IMEI – International Mobile Equipment Identifier)
- Device type and model
- Internet Protocol (IP) addresses
- Date and time stamp information of device connections
- Geo location
- Browser information
- Operating system and version
- All linked crypto asset wallet addresses
- Client to provide a photograph (the EXIF [Exchangeable Image File Format] information should be checked)
The geographical risks of counterparty CASPs should be considered, and the PCC gives clear guidelines on the CDD of customers based on the understanding that CASPs are unlikely to ever interact with the customers physically. The requirements address the regulators’ increased concern regarding criminal activities that are so easily facilitated by crypto assets.
SOUTH AFRICAN RESERVE BANK (SARB)
Trends in global over-the-counter (OTC) foreign exchange market turnover
The SARB released its summary of the Bank for International Settlements’ report on the size and structure of OTC foreign exchange market.
It explores the effect of the COVID-19 pandemic as well as the bounce back.
It notes that there has been a significant decline in the turnover in the South African market which is contrary to the international trend.
Habib Overseas Bank to be placed in liquidation
The Prudential Authority and the SARB launched proceedings in the High Court on 21 July 2023 for an order for the final winding up of Habib Overseas Bank Limited (HOB).
This was informed by assessments undertaken by the curator which found that HOB’s financial position was significantly worse than that reported by the bank’s management. The findings by the curator concluded that HOB is insolvent.
The curator stated that there was no reasonable probability that the continuation of the curatorship would enable the bank to pay its debts or meet its obligations and become a successful concern. The curator further recommended an investigation into the affairs of HOB.
HOB’s total assets are significantly less than its liabilities, and the curator’s view is that its business model is unsustainable. As such, its view is that it is highly unlikely that HOB would be able to attract an alternative equity investor to recapitalise the bank, and that depositors would be best served by winding up the bank.
PRUDENTIAL AUTHORITY (PA)
Insurer quantitative reporting under IFRS17
The PA released Prudential Communication 7 of 2023 to guide insurers in the completion of the Quantitative Reporting Templates (QRT) under the revised requirements of International Financial Reporting Standard 17 (IFRS17) as the previous QRTs were designed under IFRS4.
In terms of the QRTs for 2023: the first submission for the current period should be under IFRS17, and the previous submission under IFRS4.
There is also some clarity provided on the correct way to approach “written”, “earned”, “unearned” premiums, as well as Deferred Acquisition Costs, Technical Provisions and Liability for Remaining Coverage.
Extension to regulatory reforms
The PA released Guidance Note 3 of 2023 on 17 July to extend the deadlines for various regulatory reforms that are underway.
It has proposed the following changes:
| Regulatory reform | Proposed implementation date |
| Interest rate risk in the banking book: Disclosure requirements | 1 January 2024 |
| Revised standardised approach for credit risk | 1 July 2025 |
| Revised internal ratings-based approaches for credit risk | 1 July 2025 |
| Revised operational risk framework | 1 July 2025 |
| Leverage ratio – revised exposure definition | 1 July 2025 |
| Minimum capital requirements for market risk | 1 July 2025 |
| Revised credit valuation adjustment framework | 1 July 2025 |
| Output floor | 1 July 2025: 60% |
| 1 January 2026: 65% | |
| 1 January 2027: 70% | |
| 1 January 2028: 72.5% | |
| Prudential treatment of banks’ exposures to crypto assets | 1 January 2026 |
Acknowledgement from the auditors and chief executive officer are required to be submitted to the PA.
NATIONAL TREASURY
Deposit insurance regulations
National Treasury provided a comprehensive summary of the need, impact, and intended operation of the Deposit Insurance Scheme for South Africa.
This will essentially be the last round of engagement and input from industry.
INFORMATION REGULATOR (IR)
R5 million fine issued to Department of Justice
The IR issued a R5 million fine to the Department of Justice (DoJ) on 3 July 2023 after the DoJ failed to comply with the Enforcement Notice issued on 9 May 2023.
If the fine and actions under the Enforcement Notice remain outstanding the IR could implement court proceedings (and waste more of our taxes – Ed.).
Election to the International Conference for Information Commissioners (ICIC) executive committee
The IR issued itself a congratulatory media statement on 22 June as the Regulator (Advocate Pansy Tlakula) has been elected as a member of the Executive Committee of the ICIC.
The Regulator was nominated and elected to serve alongside other access to information regulatory bodies from Argentina, Bangladesh, and Bermuda.
FINANCIAL SECTOR TRANSFORMATION COUNCIL (FSTC)
The FSTC confirmed that it expects enterprises to submit returns by 13 October 2023.
Reports can be submitted here.
The regular affidavits can be found here.
OMBUDS
Appointment of Tax Ombud
The Minister of Finance has appointed Yanga Mputa as the Tax Ombud with effect from 1 July 2023. Her appointment is for a period of five years.
Mputa was previously a tax specialist at SARS, and leaves her current position as Chief Director: Legal Tax Design at National Treasury to take on this role.
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